Mexican Free Trade May Hit US Workers

ByDavid FrancisFebruary 22, 1991

IN Bangladesh, the cost of labor required to make a shirt is 10 cents. In the United States, it is $1.76. In Mexico, labor costs at an auto engine plant run $1.50 an hour, about 6 percent of the $25-per-hour labor cost in a similar plant in the US. And the Mexican engine plant is 80 percent as productive as the US plant.

Such numbers are going to be bandied about more often in the coming months. Congress has begun a debate on the merits of a free-trade agreement with Mexico, a country of 86 million people who earn on average around $2,000 a year.

The two-year-old free-trade deal with Canada sailed through Congress with little trouble. The proposal of President Bush for free trade with Mexico faces much more opposition.

Last week the AFL-CIO secretary-treasurer, Thomas Donahue, told the Senate Finance Committee that the president's proposal ``would be an economic and social disaster for US workers and their communities.'' It would, he added, encourage greater capital outflows, increase imports from Mexico, reduce employment in the US, and accelerate the deindustrialization of the American economy that occurred in the 1980s.

More hearings were held this week in both the Senate and the House on the President's request for ``fast-track'' authority to negotiate a Mexican deal. Under fast-track procedure, Congress will have only the right to approve or disapprove any deal within 90 days. Congress could not amend the agreement.

Among the factors working against the agreement is a new acceptability in some economic circles for the AFL-CIO arguments. There is growing concern that ``cheap labor'' in the developing countries already could be forcing down wages of US workers.

Jeff Faux, president of the Economic Policy Institute (EPI) in Washington, notes that between 1979 and 1987, the real income (after inflation) of families headed by high school graduates aged 25 to 34 dropped 7 percent. For white male high school graduates who have worked one to five years, the drop was 18 percent.

Faux blames this wage decline partially on direct import competition from low-wage countries plus a reluctance by US companies to invest in as much productivity-boosting new plant and equipment. If Mexico gets free trade, the one-quarter of Americans with the highest incomes, many college-educated, would get most of the benefits, Faux says. That would continue a trend during the 1980s for the well-to-do to prosper. The three-fourths of Americans at the bottom and the middle would suffer more from job losses and shrinking real incomes than they would gain by cheaper imports.

A new study by the International Trade Commission concedes that under a Mexican free-trade deal unskilled workers in the US would suffer a ``slight decline'' in real income while skilled workers and owners of capital would benefit.

In a phone interview, Faux expressed some astonishment that Democratic party politicians have not been attacking the Mexican proposal as another indication of what that party claims is a Bush administration tendency in economic policy to favor the rich.

The classic economic theory of international trade refers to ``comparative advantage'' - that each nation has certain advantages in labor, raw materials, or productive facilities that enable it to export certain goods relatively cheaply. Thus international commerce raises living standards for both trading partners.

But EPI senior fellow Walter Russell Mead notes that free-trade advocates in this country want free trade in goods and services and the free flow of capital across borders. But most don't want the free movement of labor - open immigration.

As a result, says Mr. Mead, manufacturing wage differentials between advanced and developing country economies are substantially greater than differences in productivity. In theory, that distortion should quickly disappear. But it doesn't. Some developing countries restrain wages on purpose to maintain their export advantage. Governments discourage labor unions or ban strikes.

So, Mead maintains, just as world trading rules prohibit dumping, they must provide international standards for the relation of wages to productivity, workplace safety, social insurance, and even industrial environmental cost factors. Otherwise, advanced countries will use more protectionism against low-wage imports.